There are over 44 types of financing available to small business owners, and each financing provider has its own formula for calculating how much money—if any—they’re willing to give your business.
If you don’t initially qualify for the financing you want, it’s often hard to figure out what the lender identified in your profile that lead them to say no. And if you don’t ask the lender, you’ll likely fall into the same boat as the 23% of business owners denied for financing who never find out why.
First know that all lenders will consider the “5C’s” of credit: Credit History, Capacity, Collateral, Capital and Condition.
But here’s a tip: Along with credit, one thing most lenders are going to look at is your business checking account information, particularly if you’re seeking a term loan or line of credit.
It’s in your best interest to know what a lender might want to see when analyzing your business bank account information. Here are four key things lenders consider in your business banking records to determine your eligibility for financing.
1. Cash(flow) Is King
Many business owners think that all banks want to know is whether the business is profitable. Most lenders, however, are more interested in seeing that your business brings in a healthy amount of cash each month in comparison to your expenses. In particular, they’re going to want to see that your average daily balance—or the amount remaining in your bank account at the end of each business day—does not drop below $1,000. A balance below $1,000 could show that your business may be on the verge of failure.
Pro tip: One way to keep that balance up is by utilizing a business credit card. Make payments via your business credit card while you build a reserve in your account, and pay the card off with the new reserve in your account just before the payment due date to build your business credit scores. (Business credit scores are another important factor banks will take into consideration!)
2. Whether You Can Cover More Than Your Current Debts
Along with maintaining positive cash flow, having your business debts under control is one of the biggest signs of a financially healthy company.
Many banks and some alternative lenders are going to calculate what’s called a debt-service coverage ratio (DSCR), which is a measure of your company’s cash flow available to make all of your current debt obligations.
Lenders generally want to see a DSCR of 1.25 or higher—meaning if you have a $1,000 debt obligation, you’ll need $1,250 in free cash flow to qualify for a loan. A DSCR of less than one means your business has less free cash flow than the amount of debt it’s obligated to, and lenders will be unwilling to lend to your business.
Additionally, if your business currently has secured financing from another lender, that lender will put a UCC filing on your business assets. Should you want financing from another bank, that bank may not be willing to lend because they will not have first rights to your business assets should you default.
A business credit card is an exception to this rule because they are an unsecured form of credit and no UCC is filed.
3. Your Annual Sales Total
An average of your annual or monthly sales is a typical ask from lenders. They’ll use that number to determine your eligibility, as well as how much money you’ll be able to take on and pay back.
In the case of banks, most won’t lend to companies that are generating less than $100K in annual revenue.
Let’s say you’re applying for a business loan from your local bank. If you meet the bank’s qualifications, they’ll likely be willing to lend you between 10-15% of your annual sales. If a line of credit is what you’re looking for, it will be closer to 10%. So if you made $1 million in annual sales last year, a bank likely will not be willing to lend you more than $150,000.
4. Your Customer Base
In addition to the amount of revenue you’re bringing in, lenders are going to look at where your revenue is coming from. If your revenue comes from a large number of customers, that’s a sign of good business health in the eyes of lenders—if one of your customers drops you, you’ll be able to continue bringing in enough money to run your business while you look for more customers to fill the gap.
If the bulk of your business income comes from one or two customers, that throws a red flag. The lender will consider this question: If that customer goes under, doesn’t want to do business with you anymore, or decides not to pay you, what are you left with?
(There are exceptions, for example, if your biggest customer is one like the U.S. government or large private company that you have a long history with.)
Consider this example. You bring in $1 million in annual revenue, but $400,000 of that is from one customer. A lender will discount the impact of that one customer, and may even calculate your capacity to take on financing without that customer. In other words, your annual revenue in the eyes of the lender would be $600,000, making the amount they’re willing to lend you more like $90,000 or less rather than that $150,000 mark if your customer base was more diversified.
While it’s a large determining factor, your business banking records are not the only thing a lender’s going to consider before making a decision about financing your business. In particular, make sure you’re monitoring your personal and business credit scores well before you need to seek out that infusion of cash from a lender. Knowing your credit scores and key factors in your banking records will arm you with the knowledge you’ll need to start the financing process on the right foot.
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